Gold wipes $560 billion from central banks as equities rally

Investors are dumping gold funds at the fastest pace in two years in favor of equities, compounding a slump that has wiped $560 billion from the value of central bank reserves.

Exchange-traded products linked to gold dropped $37.2 billion in 2013 as the metal reached a two-year low yesterday. Gold funds suffered net outflows of $11.2 billion this year through April 10, the most since 2011, while global and U.S. equity funds had net inflows of $21.25 billion, according to Cambridge, Massachusetts-based EPFR Global.

Central banks are among the biggest losers because they own 31,694.8 metric tons, or 19% of all the gold mined, according to the World Gold Council in London. After rallying for 12 straight years, the metal has tumbled 28% from its September 2011 record of $1,923.70 an ounce. Growing economies and corporate profits, along with slowing inflation, boosted global equities by $2.28 trillion this year at the expense of the traditional store of value, according to data compiled by Bloomberg.

“There’s a perception that risk has been lessened, and with that, investors are looking for assets that either generate income or have growth potential, neither of which gold has,” Anthony Valeri, a market strategist with LPL Financial Corp. in San Diego, which oversees $350 billion. “We’ve seen a grab for yield, and without a yield, gold has been left out.”

Bear Market

Gold futures in New York slumped 17% this year, the worst start since 1981, after a 9.3% drop on April 15 that capped the biggest two-day decline since January 1980. The metal tumbled into a bear market on April 12, losing more than 20% since the record close in August 2011, the common definition of bear market.

Bullion lost ground as the U.S. recovery gained momentum, the dollar rose and Federal Reserve policy makers signaled they may scale back on stimulus, curbing demand for gold as a haven. Goldman Sachs Group Inc. said April 10 that the turn in the gold cycle was quickening and that investors should sell gold.

The metal’s appeal as a hedge against inflation has been eroded partly by the slowing rise in consumer prices even after five years of government stimulus. The cost of living in the U.S. fell 0.2% in March, the first drop in four months, as cheaper gasoline and clothing kept consumer prices in check, Labor Department data showed yesterday. Inflation expectations as measured by the break-even rate for five-year Treasury Inflation Protected Securities reached the lowest since Jan. 2.